Just six months into his new job as president of the IDB, Luis Alberto Moreno is facing tough questions over what role the bank should play in financing one of the most volatile regions in the world.
Some market players think the role needs to be negligible, at best. It should be converted into a museum for bad macroeconomic policies, says an executive at a New York-based investment bank, echoing a widespread sentiment among emerging market investors and private-sector financiers that the market, not Washington-based bureaucracies, should allocate capital.
The dynamics of Latin America are changing too. In recent years, the market for the IDBs services has transformed. Rapid growth in private capital flows has made its financial resources less important than before. Political leaders are increasingly sketching their own vision of inclusive growth in Latin America, often in direct opposition to the Washington-based multilaterals. And the regions economies on the surface at least seem much healthier than they were three or four years ago. High commodity prices and sounder fiscal management mean that Latin America is no longer as dependent on official financing as before.
Yet the IDB relies for its survival on continued borrowing from middle-income countries like Brazil, Argentina, Colombia, Peru and Venezuela. By size, the banks activities pale in comparison to private-sector flows to the region forecast this year to reach just under $50 billion, according to the Institute of International Finance, nearly twice the total for 2003. The IDB, in contrast, will lend less than $10 billion to the region annually.
It is not a problem lost on the incoming president. This is one of the most difficult issues facing the bank, Moreno tells Emerging Markets. But I think the challenge that the IDB faces is a challenge that faces most development banks that constant search for how to do your job better.
There is no magic bullet in development with regards to where the growth is. Its constant trial and error.
Error is something the bank can ill afford, especially when it comes to stepping up its private-sector activities. The bank will have to do more private-sector activity and find more ways to do lending, and we have to focus on that and developing new instruments and new lending we need to be able to adapt to those changes, he says.
Moreno, who until October was Colombian ambassador to the US, has already set in motion a comprehensive internal review to look at how the IDB can realign itself with the new economic and financial realities of Latin America. The review, according to sources within the bank, will also comprise what promises to be a more radical shake-up of the institution, which has plodded along for much of the last two decades under the steady leadership of Enrique Iglesias, the distinguished Uruguayan.
Moreno expects it will take at least two more months before anything concrete is announced: Its more than a reorganization, he says. Its like the modernization of any state. Its a process of looking at the problems specifically. It will take time to do this.
Once you have defined exactly where youre moving, then itll take another 18 to 24 months to get there.
Moreno, like Paul Wolfowitz, his counterpart at the World Bank, intends to make infrastructure a key focus of the banks activities. It also happens to be one area where the bank can make a difference. Moreno points out that with an infrastructure gap of some $80 billion, the region will need multiple sources of funds and expertise for some time to come.
This cannot be done simply by governments; it has to be through public-private partnerships, says Moreno. It requires a special focus. But more importantly, it requires a lot of stars being aligned. On the risk side, it requires the private-sector players to come on board. This is an area where we will definitely be more focused and involved.
Raising the caps
Internal constraints still block the banks progress towards this goal. For a start, investment in any private-sector project is capped at 25%, in part because the banks rationale is to support the private sector, not compete with it.
But the bank has taken steps in this direction, for example by raising the caps on financing private-sector projects from $75 million to $200 million. The bank, says Moreno, is now working on a unified strategy to approach the private sector.
This is clearly a challenge, that we have to learn to work better with the private sector. We cannot be all things to the private sector. There will be things that private banks can do much faster.
But, he says, We are always looking for ways we can provide additionality. Is there room for improvement from our perspective? Certainly. The challenge is how to do that.
A recent report from the Center for Global Development (CGD), whose authors include former IDB chief economist Ricardo Hausmann and former Mexican finance minister Angel Gurria, stresses expanding and modernizing the IDBs private-sector operations.
Liliana Rojas-Suarez, senior fellow at the CGD and a lead author of the report, says that the IDB should undertake detailed, independent analysis of the cost of doing business with the IDB. Is it in the operations? Is it in actual costs? Are the spreads too large? Where exactly are the costs? she says. If the bank does this it will send a very strong signal that it is committed to this kind of reform.
Moreno acknowledges that a closer look at these questions is important, but he says that is part of a much wider process of listening to the banks constituents. More than just looking at costs, what weve been doing is beginning to become very much a listening process, he says. I think were increasingly doing this listening process inside and outside the bank to understand areas where we should improve.
The IDB is moving much more towards sector based, results oriented lending. It is also moving to strengthen its field offices in order to make country ownership of programmes a greater focus. The bank is also looking to enhance the quality of its staff, especially in the field, according to sources close to the reorganization.
For the IDB to remain relevant it needs to increase its flexibility to design, as Rojas-Suarez puts it, different products for different countries in different times. Different instruments include grants, loans, local currency issues and so on, beyond the plain vanilla loan the bank has traditionally offered.
The bank has already begun experimenting with new products, including local currency borrowing. Previously, the bank could only borrow in Latin American currencies if it immediately swapped the proceeds into dollars. Now it can also borrow locally if it lends the proceeds to a specific project. Developing a market for Latin currency bonds would be an enormous benefit to Latin capital markets, although the banks local currency lending plans are in their infancy. There is a big demand for local currency products especially in Mexico, Brazil and Colombia. This continues to be an agenda item for us, he says.
Since October, Moreno has spent much of his time doing what he was previously most accustomed to: diplomacy. He has been actively reaching out to member states, including those like Brazil who opposed his candidacy. My mandate is to work with all countries. I hope I will be able to work well with some of the countries that have not supported me, which are very, very relevant counties, Moreno says. Reinforcing the conciliatory tone, he adds, I will deal with countries to the right, to the left and in the centre, just as the bank throughout [its life] has done when dealing with countries on any path.
The more I go around Latin America, the more I see the power of the [IDBs] brand name, says Moreno. The fact that the IDB has such a good name in the region bodes well for us.
Moreno campaigned vigorously for his job for months, securing the direct backing of US president George Bush early on. A nod from Washington was crucial since the US, the banks single largest shareholder with 30% of the votes, can veto any candidate it deems unsuitable.
Moreno also needed the backing of a majority of Latin American and Caribbean nations. In the final event, big countries Brazil, Venezuela and Peru among them voted against him; Moreno nevertheless picked up a large majority of votes, shortly after candidates from Venezuela and Nicaragua pulled out of the race at the last minute.
Crisis and support
Fresh challenges await Moreno and the IDB. The commodity boom that has led to an upswing in Latin growth is unlikely to continue indefinitely. Private capital flows to the region may slow if US interest rates rise further. If another downturn hits, the IDB may well find increased demand for its lending once again.
True, there is a boom and bust cycle, he says. I think that the bank has always tried to portray itself as a counter-
But the bank will need all the support it can get from the US its biggest shareholder if it is to stump up more cash for renewed lending. It helps that Morenos main triumph as ambassador was in lobbying US Congress to support Plan Colombia, the highly controversial scheme to combat narcotics and guerrilla activity in his native country. I think [a good relationship with the US] is never a loss, he says.
Still, this isnt something hes overly concerned about today. We dont have any real concerns right now. A slowdown in the world economy would hit Latin America but we dont see that happening, he says. Were optimistic.